JD (NASDAQ:JD) stock is offering investors a pretty good buying opportunity. JD stock is off about 8% from its 52-week high of $42.
It seems like the stock should be much cheaper given the fast-spreading virus in Chinese cities. But JD is an online Chinese e-commerce seller. Kept indoors, people are bound to do more buying and interacting online.
In effect, that is basically good business for JD stock and Alibaba Group (NYSE:BABA), its main Chinese competitor. That is a contrarian view about a serious health issue in the country. But, unfortunately, it is likely more true than not.
JD Stock’s 2020 Outlook
JD’s revenue surged 28% in the third quarter ending September. That is pretty good for a company with a $54 billion market value and trailing 12-month sales of $75.7 billion.
Moreover, other financial and key metrics were through the roof. For example, the company is now free cash flow (FCF) positive. It generated $2.2 billion in FCF for the last 12 months, up 183% over the prior-year 12 months.
Also, its active accounts increased to 334.4 million in the twelve months ended Sept. 30, 2019, from 321.3 million in the twelve months ended June 30, 2019. That is a gain of 4%.
In addition, JD.com said it expects its net revenues ending December will be up 21% to 25% over the prior year.
This kind of growth rate for such a large company can really only mean one thing: Chinese buyers are really taking to buying their goods online.
The Effect of the Coronavirus
So far, JD has not made a statement about the effect of the Chinese coronavirus on its business. I suspect that it will have a dampening effect on the blistering growth rate that JD has generated in the past.
China is bracing for the economic effects on its Q1 business. For example, The Financial Times reported that Shanghai has ordered companies to shut down completely until Feb. 10.
Economists are talking about a “pronounced slowdown” in the countries economic growth.
Contrarian Investing by Buying JD Stock
However, as an investor, you have to take a contrarian view and look through to the other side. For example, the SARs virus outbreak in 2003 did not last forever. In fact, the Chinese government instituted expansionary policies after the virus’s growth slowed to help push up consumption in the economy.
I would expect that something similar will happen this time. Therefore, along with pent-up demand, these policies will likely spur online purchases once the coronavirus gets under control.
So, as a contrarian, you have to buy the dips. And you may have to do it several times. So far, the 8% hit to JD stock from its highs may not be the last of the downturn. But that is what contrarian investing is all about.
Don’t forget that the stock discounts the future for six-to-nine months ahead of time. Right now JD stock is reacting to the urgent situation in China. At some point, investors will start discounting the turnaround and push up JD stock.
You want to be in a profitable company stock like JD stock, which already has a lot of growth drivers. For example, one of the best growth drivers is the move by Chinese consumers to more online purchases of goods.
Given that the virus is forcing people to stay indoors, this is likely to be a positive factor at some point, even though economic activity and incomes will be lower.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.